COUNTERCOLUMN: All Your Bias Are Belong to Us

"In the future, everyone will have access to VA health care for fifteen minutes."

Thursday, December 16, 2004

First Command

A lot of people have written in asking my take on the recent announcement that First Command is disgorging $12 million dollars to settle NASD charges of misleading advertising and inappropriate sales practices. Sorry I hadn't gotten to it earlier.

Longtime readers will remember that I went after First Command way back in February. The New York Times followed up in July, and included insurance scammers in their greatly expanded story, featuring some super leg work by Times reporter Diana Henriques.

First Command has abandoned its sales of contractual plans. Which is a good thing: They were a lousy product.

By their fruits ye shall know them.

Yeah, it's true that if you stick with the program for 15 years, that 50% load can, theoretically, be amortized down to 3.3%. But what First Command left out was that only 43% -- less than half -- of all program participants actually realized that amortization. The rest dropped out somewhere along the way.

The remainder, of course, were locked into the underperforming Fidelity Destiny and Destiny II funds, which continue to lag their peers over the last ten years. Destiny is still in the bottom quintile of its Morningstar large growth category over the last ten years, trailing the S & P 500 by an ASTOUNDING 5% annualized. Hell, that's a full sales load all by itself! Every year!

Destiny II, at least, seems to be holding its own. But ONLY if you don't adjust it for the sales load. Factor in the sales load, and it's a disaster.

All in all, it was a lousy deal for America's military families, compared to other investment opportunities easily available for a fraction of the cost.

That said, is this a great victory?

No.

Because while First Command's program was lousy, at least it got people saving SOMETHING, who otherwise may not have recieved any financial education.

Several million dollars of that disgorgement will go to investor education programs, presumeably targeting military families.

It's important we make the most of that money, because there are a lot of financial advisors who will shortly be leaving the military markets. It will be tough for them to make a good living without the availability of contractual plans.

It's not a time to gloat. Yes, First Command needed to be put down. But there were doubtlessly a lot of hardworking advisors trying their best who will have to readjust their livelihoods. And no reputable financial advisory firm is going to touch these guys, because they were so mistrained by First Command -- they're walking NASD fines waiting to happen.

Maybe some of them will join Prudential. Prudential's racked up so many fines over the years for fraud and unsuitability that no one would notice another 12 million dollars.

A word on the NASD process:

You don't get to go to court vs. your broker, unless it's part of a class action. Normally, investors are bound to go through mandatory arbitration courtesy of the NASD, thanks to the fine print in their contracts.

It's a much cheaper process, fortunately, and usually quicker.

Unfortunately, the NASD arbitration board members are industry insiders themselves, and it's often tough for investors to get a fair shake. The NASD has to get its bills paid somehow. And they are well aware who their constituency is: the broker dealers and advisory firms they regulate.

$12 million dollars is a drop in the bucket for a company like First Command. The guys at corporate would hardly blink at it. The guys who hurt is the junior reps in the field, who just had their business model taken out from under them.

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